Impacts of Bad Credit score

In school, you were always told about things going on in your permanent record. The only permanent record you have as an adult is your credit score. However, your credit score does follow you around everywhere you go. So it’s absolutely important to understand the various factors that affect credit score.

It decides whether you can get a loan to buy a car or house. It impacts your interest rates and insurance premiums. A bad credit score forces you to pay expensive deposits for rent, utilities, and mobile phone service. It can even affect whether you get a job or a promotion.

Bad credit is like a black cloud hanging over you everywhere you go. It’s overwhelming and fills many people with uncertainty. But you don’t need to passively accept bad credit. Stop holding yourself back with fear and doubts. Debt can be conquered.

It’s possible to buy the car or house of your dreams. Taking control of your financial situation is a breeze when your know-how.

How to get a free annual credit report

Your credit score affects your life in many ways. So the only way to improve credit and protect yourself and your money is to try to stay on top of Big Brother. All three agencies are required by federal law to provide you with a free annual credit report at your request once every 12 months. You also have 60 days to report a free copy if you’re denied credit, insurance, or employment based on bad credit. To order, visit annualcreditreport.com or call 1-877-322-8228.

Anatomy of FICO Score

Sometimes you will be in wonder that why is my credit score going down after a certain time? Why would my credit score drop?

First, what are the components of your FICO score anyway? Your credit score is generally comprised of the following five components.

Why did my credit score drop

  • 35% Payment History
  • 30% Credit Utilization
  • 15% Length of Credit History
  • 10% Credit Inquiries
  • 10% Type of Credit Used

Why does credit score vary across credit bureaus?

To make the lending decision quick and properly more than 90% of business uses the FICO system to know the financial health of their customer. The biggest three credit reporting companies in the United States Market are Experian, TransUnion, and  Equifax.

Each credit reporting company set their own standard and business model because of this each of them makes their own changes to formulas according to their own rules. This change causes your credit score may very little bit for different reporting companies. However, there are various ways to improve credit scores.

Seven Factors that affect credit score

Factors that affect credit score

 

Payment history (35%)

This means the bulk of your credit score is made up of on-time payments and how much available credit you have. If you pay all your dues, credit accounts, loans on time each month then you are in a good position. How you handle your debt and how well you pay them is the most important factor that affects your credit score.

If you miss any payment then a single late payment could have a significant effect on your credit score if you hold a higher credit score. According to the FICO data, a 30-day late payment could hurt you as much as a 90 to 110 points drop in your FICO credit score. Provided that you are an initial score of more than 780 and you never missed a payment on a credit card.

Debt Burden (30%)

Many experts will tell you to stick to 30 percent of your available credit. I recommend keeping your available credit at 94 percent. You should only be spending $6 for every $100 of available credit you have. In short debt burden is the other most important factor that affects your credit score.

If you want to successfully raise your credit to the best possible score. So in practice, your credit limit will be five to six times high than your usages limit to game the system. This lowers your credit risk and makes you someone lenders love to work with.

Length of your credit history (15%)

The length of your credit history contributes 15 percent of your FICO score. This is a relatively less weighted factor in all other factors that affect credit score.

Normally it takes six months of payment history to establish a credit score. In general, the longer the history, the more effect on the score.

So, in a nutshell, among all the factors that affect credit score, the largest component of your score, Payment History, looks at missed or late payments. Credit utilization subtracts the amount owed from your credit limit. Length of Credit History looks basically at the Average Age of Accounts (AAoA) and how long it’s been since they were used.

Credit Inquiries or “Hard inquires” happen when you authorize a creditor to check your score. Finally, by Type of Credit Used they mean Credit Mix. They like to see a variety of different types of credit account types, e.g., revolving, installment, open.

Hard inquires may affect your Score (10%)

Hard Inquires is the less weighted factor in all other factors that affect credit score.

Applying for new credit may have an effect on your credit score but depends on each person’s credit history. In general, there is very less effect on your FICO score. One additional credit inquiry (hard) may result in five negative points in your score.

Type of Credit Used (10%)

One of the most common factors used to calculate your credit scores is Credit mix or the diversity of your credit accounts. Maintaining different types of credit accounts, such as a mortgage, personal loan, and credit card show lenders that you are a potential customer who can manage different types of debt efficiently. It also helps them get clearer information about your financial healthiness and the potential to pay back debt.

Defaulting on accounts can affect your credit

Various types of negative information like foreclosure, bankruptcy, repossession, charge-offs, settled accounts can show up on your credit report. Each of these negative items can severely hurt your credit for years, even up to a decade.

Can Service Accounts Impact My Credit Score?

Service account like a utility bill, phone bill payments don’t have any direct effects on the credit score but if you miss any payment and the account was referred to a collection agency then it could affect your credit score.

But there is good news that a new product called Experian boost allows users to get instant credit for on-time payments on utility and telecom accounts.

There are few more factors that affect credit score. These are the less important factors but are still quite important.

  • How the credit reporting agencies collect and maintain your credit information
  • What information does CRA collect
  • How is your fico score calculated

The three Credit Reporting Agencies

There are really only three agencies that you need to concern yourself with when talking about your credit score. Feel free to skip ahead if you already know this.

To make the lending decision quick and properly more than 90% of business uses the FICO system to know the financial health of their customer. The biggest three credit reporting companies in the United States Market are Experian, TransUnion, and  Equifax.

Each credit reporting company set their own standard and business model because of this each of them makes their own changes to formulas according to their own rules. This change causes your credit score may very little bit for different reporting companies. However, there are a lot of things and financial habits that matter to your credit score.

What information does CRA collect and maintain?

We may not tell you the exact details of how the FICO credit score is calculated but FICO gives us information about what kind of information matters on its scoring algorithm.

Equifax, Experian, and TransUnion are the big three report agencies who keep track of your financial transaction and other information, including:

• Credit card balances
• History of balances of loan and credit cards
• History of payments on loan and credit cards
• Number and type of accounts you hold
• Bankruptcy filings

All these agencies mainly collect and maintain your credit information and then resell it to other businesses. The Experian credit score is a FICO 8 score which ranges between 300 and 850TransUnion score also ranges from 300 to 850. Like others, Equifax also provides FICO and Vantage Score and uses different scoring models which range between 300 and 850.

How is your fico score calculated?

Your credit score is based on a secret algorithm designed by FICO, originally Fair, Isaac, and Company. The details of this algorithm are still hidden under a veil of secrecy even today. Though we do know the formula is generally comprised of the following five components or factors.

• Most Important factors – 35% Payment History
• Very Important factors – 30% Credit Utilization
• Somewhat important – 15% Length of Credit History
• Somewhat important – 10% Credit Inquiries
• Less Important factors – 10% Type of Credit Used

Now let’s talk about small things you can do that can potentially make a big impact on your score to change your life!

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7 Important Factors that affect credit score - 740credit.com · September 2, 2021 at 6:57 pm

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